Champions Oncology, Inc. (CSBR) Q4 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to Champions Oncology Fourth Quarter and Fiscal Year 2017 Earnings Call. All lines have been placed on a listen-only mode and the floor will be open for questions and comments following the presentation. [Operator Instructions]. At this time, it is my pleasure to turn the floor over to your host, Ronnie Morris. Sir the floor is yours.

Good afternoon. I’m Ronnie Morris, the CEO of Champions Oncology. I’m joined today by David Miller, our Vice President of Finance and Administration. Thank you for joining us for our quarterly earnings call. Before I start, I will remind you that I we will make forward-looking statements during the call and actual results could differ materially from what is described in those statements. Additional information on factors that could cause results to differ is available in our Forms 10-Q and Form 10-K. Reconciliation of non-GAAP financial measures that may be discussed the call to GAAP financial measures in available in the earnings release. Overall we had another year of substantial progress for Champions Oncology. Several highlights include, we had record annual bookings and the continued growth and strength in our quarterly bookings gives us the confidence to provide forward-looking projections of strong growth for the current fiscal year. We had record annual revenues of $15.4 million, which was 38% increase year-over-year. The cost control efforts we established over the last two years continue to pay dividends and we are generating more revenue with a minimal increase in cost. Strategically, we began delivering on a number of new products discussed last year that provide us with plenty of runway to grow revenue at an accelerated pace. We just moved into our own new lab facility, which represents a major milestone for Champions Oncology. And finally, we are expecting strong Q1 results with at least 25% increase in revenue, as compared to Q1 last year. In terms of forecasting revenue, as we said in the past, it was the single more product indicator of our future success than bookings. As a reminder, we define bookings as the signing of a contract with a customer. These contracts include well-defined studies that are clear deliverables in dollar amounts. In general there is a couple of quarters for bookings to turn into revenue. As I’ve talked about our call in March, that January quarter was a strong bookings quarter for Champions. I am happy to report again that our fiscal [ph] quarter Q4 was strong as well. We've seen multiple positive trends in our bookings as we continue to increase the number of study site per quarter, along with the customers increasing the size of their studies and the expansion of our customer base as we generate new customers. As we are currently all into the end of Q1, we can constantly project an excellent Q1 bookings with a robust pipeline which is a good start to our new fiscal year. Our bookings in fiscal year 2017 were 51% greater than our bookings for fiscal year 2016. Overall, the pattern of bookings that we have delivered over the last several quarters supports our projection of continued revenue growth in fiscal 2018. We have a number of new products all in [indiscernible] of tumor graft are patient-derived xenograft that will contribute to the acceleration of our revenue growth. The three efforts that are currently getting the most attention are acute myeloid leukaemia, known as AML, ImmunoGraft and our co-clinical product. Let me update you on each of these. First AML, more then a year ago we saw the need among our customer base for modelling AML using a PDX approach., because AML is not a solid tumor, the standard technique are used for implanting and measuring growth in that work with AML. We treated new technological approaches to build these models and as a result we now give facility studies for pharma companies. From the commercial standpoint, AML has started to contribute to bookings and revenue as we saw meaningful AML revenue in 2017 and expected to contribute to our accelerating growth in fiscal 2018. As we run more AML studies and gather important information [indiscernible] immuno mode for PDX, we expect to further expand the commercialization of our AML offering to additional pharma companies in the coming years. The second product I would like to discuss is ImmunoGraft. We have been working on ImmunoGraft for more than a year now. Like AML we have recognized revenue from this work and signed several studies, including a large strategic contract with a pharma company to immuno-oncology [indiscernible] fiscal 2018. Given the excitement and attention that immuno-oncology is receiving, we are investing in research dollars that includes different types of mice, new human addition procedures and correlation data that will enable to us expand the ImmunoGraft offering. With the tremendous pharma investment in the IR space, we see great revenue opportunities if we are successful in the development of the next generation model with the testing of immuno-oncology drugs. The third new product I’ve talked about in the past is our co-clinical tumor graft offerings. As a reminder, these are studies done at parallel with human clinical trials in which we typically fill tumor graft from clinical trial patient to supplement and expand the information deemed by the pharma company is part of the early stage human trials, which is used to developing clinical development strategy for later stage human trials. We signed our first co-clinical deal before the end of calendar 2015. It has been slow to start because of the changes in timing of the human trials. We have now found multiple co-clinical deals totalling over $9 million. Because the conversion to revenue is more difficult to predict and slower to recognize, we did not include the co-clinical finance in our booking numbers. Of the $9 million signed in co-clinical studies to date we have recognized less than $53,000 in revenue. We are typically in more of a ramp up in this past year which caused us to fall short of our revenue guidance. However, we do expect to see some additional revenue during fiscal 2018 and will contribute to our expected revenue growth. Additionally, one of our focus strategies for 2018 is to concentrate on assessing and expanding the market opportunities for co-clinical studies. Our PDX studies are traditionally in a pre-development stage, working with pharmas pre-clinical budgets. Clinical works is generally allocated significantly higher budget dollars and we think this is a great opportunity and counter us for potential revenue growth in the years to come. In the last few weeks we begin moving into our own state of the art new lab facility in Rockville, Maryland. This is a significant milestone for Champions for several reasons. Our new lab doubles our current capacities, which will enable us to run studies more efficiently, while also ensuring capacity for additional growth. Additionally, since we are running the entire lab operations and no longer outsourcing lab maintenance, we expect to realize material quarterly cost savings when we complete the full transition to our new facility which we expect by the end of second quarter. As we have mentioned in the past, the deferred revenue we expect to see approximately $1 million a year. Due to the transition of new higher lab as part Q1 and Q2, that we will be incurring cost in two facilities. Although we saw slight recovery [ph] of our announced goals, fiscal year 2017 still resulted in 38% revenue growth and 51% bookings growth. And looking ahead to fiscal year 2018, we believe that our core growth will continue to grow at healthy pace, while we are advancing our new offerings. Between our bookings and revenue growth, as well as our stable expenses, we are confident that fiscal year 2018 will result in a net profitable year. With that, I’ll turn over to David Miller, our VP of Finance to talk about our financial results.

Thanks, Ronnie. Now let me review the financial results we announced. Our full results on Form 10-K will be filed on before July 31. Overall revenue for the fourth quarter was $3.7 million, a 31% increase year-over-year driven primarily by 49% percent growth in our TOS segment. The year-over-year increase in our fourth quarter revenue was due to the sustained strong bookings growth we have been discussing on our quarterly call. For fiscal 2017 total revenue was a record to $15.4 million, an increase of 38% over 2016, which had revenue of $11.2 million. Ronnie mentioned, 2017 was a strong year for Champions. And this can be seen with the year-over-year percentage revenue growth. However, we are still not satisfied and have further financial milestones to achieve. Now let me get into specific numbers for each business segment. TOS revenue was $3.4 million for the three months ended April 30th 2017, a 49% percent increase over $2.3 million revenue recognized in the fourth quarter of 2016. TOS revenue for the full fiscal year of 2017 was $13.7 million, also a 49% increase over fiscal 2016 TOS revenue of $9.2 million. TOS segment gross margin was 31% for the quarter compared to 16% in the same period last year. TOS gross margin for fiscal 2007 was 40% as compared to 29% for fiscal 2016. As our revenue continues to grow, we expect our gross margins to improve as we leverage our fixed costs against a higher revenue base. However, along with the growth at times variable cost may increase as we incur expenses at the start of new studies, putting short term pressure on margins. An increase in TOS cost of sales can often be viewed as an increase in study [ph] work being performed leading up to revenue which we recognized in the coming quarters. Long-term we continue to expect gross margins to trend upward, as we continue to operate more efficiently and as we transition our studies to our new lab and realize a reduction in our per study cost of sales. TOS segment revenue was 366,000 for the fourth quarter compared to 585,000 in the same period last year. The decrease in TOS revenue was expected, as we shift our strategic efforts primarily to our TOS business. We had a decline in the number of TOS implants which directly leads for decline in TOS studies. As we have discussed before, we do not expect the TOS to drive revenue growth, but the business segment still provides some strategic value with how pharma and academic collaborator. As with our overall operation, we are continuing to focus on lowering our cost and as a result TOS gross margin was 27% for the fourth quarter compared to 25% in the same period last year. TOS has historically been a negative margin business, but we have since turned it around and have regularly been achieving quarterly positive gross margin. Research and development expense was $1.1 million and $1.2 million plus for the three months ended April 30th 2017 and 2016 respectively. R&D expense was $4.3 million and $4.2 million for the 12 months ended April 30th 2017 and 2016. We have made a concerted effort to control our R&D costs that can be seen by keeping them flat over the year, while at the same time investing for the future growth of our business. Sales and marketing expense was 900,000 and 750,000 for the three months ended April 30th 2017 and 2006. Sales and marketing expense was $3.3 million and $3.4 million for the 12 months ended April 30th 2017 and 2016 respectively. The increase in the fourth quarter sales and marketing is the result of commissions earned as our sales team met their sales goals for 2017. The increase does not represent the trend of rising marketing cost to support our revenue growth. This can be seen in the full year expense, as our sales and marketing costs are lower than the prior year even though revenue increased by 38%. General and administrative expense was $1.6 million and $1.1 million for the three month ended April 30th 2017 and 2016 respectively. General and administrative expense was $5 million and $5.2 million for the 12 month and that April 30th 2017 and 2016. Similar to what I just mentioned regarding sales and marketing expense, the last quarter increase is not reflective of a systemic rising cost structure, rather is primarily the result of a one-time non-cash charge to stock compensation resulting from a modification of options or option terms to our board chairman Combine our cost of sales and operating expenses were $6.1 million for the fourth quarter compared to $5.4 million in the same period last year, as the increase primarily coming from stock based compensation and commission expense. For the year, our total cost was $22.2 compared to $21.5 million a year ago. Excluding non-cash stock based compensation, our total cost for the year were $19.4 versus $18.8 million in 2016. That is 3% increase in expenses, while our revenue grew 38%. As we look ahead to next year, our fiscal 2018 we expect to maintain control on our total expenses with single digit percentage increases, while realizing double-digit revenue growth. As we complete the move to our new lab facility, expenses may run a little higher as we incur the cost of vacating two labs during the transition. However, once the move is complete which we expect by the end of our second quarter, we will realize cost savings limiting year-over-year expense increases and improving our gross margins. Now let me turn to cash. As of April 30th 2017, we had approximately $3.3 million of cash on the balance sheet and our burn rate for the quarter was less than $200,000. For the year, our cash used in operating activities was $2.8 million. Last year for the 12 months ended April 30th 2016, our cash used in operating activities was $6.4 million. We reduced our cash burn by $3.6 million or 55% percent. For the full year fiscal 2018, we expect the cash burn rate to continue to decline and ultimately become cash flow positive. However, we anticipate the cash burn rate in the first half of the year will exceed the fourth quarter burn rate, as we add fixed asset purchases related to our new lab, along with the expense of vacating two labs. While we feel good about our cash position and we're confident that we have sufficient cash to reach cash flow positive, we are on the process of securing a small line of credit. However, we don't foresee the need nor had any intentions on issuing additional equity in near term and expect to be cash flow positive on a quarterly basis towards the end of next fiscal year. Now let’s preview the first quarter of 2018 and discuss initial forecast for the full year. We expect year-over-year first quarter revenue to grow by at least 25% and year-over-year annual revenue growth to be at a minimum 20%. During the course of the year and as we have greater visibility we will update and fine tune our revenue projections. We currently expect to fully migrate – we currently expect to migrate our lab operations to the new lab by the end of the second fiscal quarter. The move will yield full year lab cost savings of approximately $1 million, which when combined with our expected revenue growth will result in cash flow positive operating results in the second half of 2018. To sum up, we had strong revenue growth in both the current quarter and full fiscal year. Our bookings growth this quarter remained strong and our expenses remained under control. As a result, we look excitedly ahead to next year and we're confident in our ability to reach capital positive on a quarterly basis. I hope our excitement and confidence in the future of the company comes through with the comment. In a moment we'll open things up for questions.

Thank you. Thank you, David. And we are excited about the progress we made last year and we're certainly very excited about this coming year. So with that I will open it up to questions.

Thank you so much. The floor is now open for questions. [Operator Instructions] And our first question comes from Leonard Becker. Leonard, go ahead. Leonard, you’re live.

Yes. Hi, guys good quarter. Can you get me to the 200,000 cash burn from the $2.3 million? I know there's a lot of stock based compensation, non-cash. What else could there be?

You take that David. Go ahead.

Sorry. So in terms of - we ended the quarter - we ended the third quarter with a $3.5 million and we ended the fourth quarter with $3.3 million. Are you trying to understand how we only burn $200,000 worth of cash?

Yes, given the income statement and what that’s so adjusting, just compared to if you would to reconcile, to see if – thus you can, if you would?

So if you – our deferred revenue increases because we - as we book more studies, we receive cash in advance of work performed. That's a big – that’s a big factor.

Okay. That was my next question if you reached cash and up front.

Yes.

So, you’re – am I right in estimating that your contribution margin is around high 60%?

Yes.

Okay. And on the savings that you're going to realize once you move into that new lab, is it all fixed or is there any savings in the variable cost?

It's a combination of both. So as opposed to outsourcing even though we give all the work without own tech, as opposed to outsourcing the lab maintenance that will all be done in house. So we will have both a reduction in our variable cost and in our fixed cost.

Okay. One other the thing, research and development costs, what actions do those go towards. Is any of that software and do you capitalize it?

So it's not software and that would probably be the only thing would be allowed to capitalize.

Great.

But it's not, so you might capitalize the R&D expense?

What if the R&D go towards if you would?

I mean, I know Ronnie, you want to take, in terms of the…

Yes, sure. So the R&D expense goes towards different collaboration, building more unique models for the bank, number one. Number two, we're involved in a lot of new areas where as we mentioned the immuno-oncology trying to find the right model for that huge field. So those are the two examples working with different academic medical centers to work on special projects that we think eventually will be innovative for the pharmaceutical companies and give us an advantage over our competitions.

Okay. Last question. What is - ff you could as far as the mice are concerned, I'm just trying to - if I could follow the mouse from start to finish, who handles it and who does what in the value chain? Just so I can understand. I mean, is there other third parties that you outsource to do certain things and I'm just curious on how that works…

Yeah. We have a couple of suppliers of the mouse suppliers, they send us the mice. We basically do all that work in-house from the implantation of the tumors to the pharmacology and then we do all the posts analysis as well afterwards. So all that's done by us in-house. We don't really outsource any of that.

Okay. Okay, great. Thanks for the clarification. All right. Those are all my questions. Thank you.

Sure.

[Operator Instructions] And our next question comes from Joshua Horowitz from Palm Small Cap Funds. Go ahead, Josh.

Thank you very much. Good quarter. Curious you know, you’re starting to get some real scale in the business, you know, have guided to some pretty substantial revenue growth going forward. Maybe you could help us understand as you get to the scale you know, what is a reasonable range for operating margin, say, you know a year or two out?

So we certainly see you know, our gross margins should really be closer to 60% as opposed to the 40% which we just recorded. A lot of times I think I mentioned, we incur cost initially and we don't recognize revenue to several months later. So there's a mismatch between our revenue and our expenses. But if we would be able to or suggest actually match them, which is a principle, we would be closer to 60% an as we move to our new lab we actually see that rising.

So help me understand what the operating margins of the business could be say, you know, at $40 million in sales?

So we think that that can be closer you know, close to 50%, you know, we’ve mild it out and we can certainly – we’ll certainly fine tune as we move into our new lab, I think that it's important that we actually have a concrete handle on the actual cost. Obviously projecting significant cost savings, but this is a big move and we'll be able to fine tune those projections as we actually move it.

Do you think that you know, most of your competitors are competing on price or have you sort of you know, as you’ve grown the company you’ve been able to make inroads with certainties, based on the quality of your service and thus you’re able to charge higher rates?

Yes, I think that’s a combination. We are certainly not the low priced player in the market where these premium price play in the market. I think two advantages we've had and allowing for our growth is one, our network that we've built up over the years with the academic medical centers allow us to get these unique patients which have unique models, which are very interesting to the pharmaceutical companies. So we get patient models and then we build models in our bank that are advanced cancers and people that have these very unique mutational profiles. And because of that a lot of the pharmaceutical companies want to work with us. I think we also have a reputation for high quality work. A lot of a good scientific rigor goes into our work. So I think those are the two main competitive advantages that we have. A lot of our competitors to just get tumors from a local hospital, they don't really have any control about which patients they're building models for. We are able to build unique cohorts and cohorts that the pharmacy companies that are looking for as they try to mimic their clinical trials. They want to do work in PDX models that are actually going to - as close as possible resemble the patients that they're going to enrol in the trial. So that makes it very important for them. So I think those are two competitive advantages.

Thank you very much.

And our next question comes from Adam Kipling from Hollywood Business [ph]. Go ahead, Adam.

Hey, good morning, guys. Can you just explain to me exactly what Hayden IR has been doing to increase shareholder value and also maybe if you can tell what they cost, what they're costing per quarter?

David, do you want to take that one?

So be lucky, to beat that one. So they’ve been - we've been meeting with investors trying to get the story out in terms of getting more exposure to our company. So that's something that they've certainly have been heavily involved with, encouraging and helping us with IR releases et cetera. In terms of the cost, I don't know if we want to get into the specific cost, what they’ve costing us. But it's a reasonable fee in my opinion.

Okay. Because it's just a little frustrating for investors to go three months without really hearing anything and listening to the conference call and seeing some of the highlights. There seemed to have been plenty of things that could have been communicated to shareholders and that's what I thought investor relations is for. So I'm kind of thinking that any money that goes to them can be better used, if it's not really increasing shareholder interest or investor interest. I really am not seeing the fruits of any labor from them. So…

So I think it's on us to come out with more press releases. I think we are probably too rigid in terms of what we consider noteworthy. We're holding ourselves to higher standard. Yes, so a lot of things that occur on a daily basis that could be noteworthy, but I think we maybe – so maybe we need to lower our own internal standard, so that that will be discussed.

And let me add, I think that over the next quarter or two, I think you'll be seeing more press releases from Champions Oncology on some of the stuff that's been going on.

And our next question comes from Steve Krueger from Foresight Investing. Please go ahead.

Good afternoon. Thanks for taking the question. Do you have any data on the correspondence between efficacy in mouse to model and ultimate efficacy in humans? You know, what percentage of the time where drug shows great efficacy in a mouse tumor model. Does that translate into efficacy in treating humans?

Yes. So one of one the other competitive advantages we've had over a lot of our competitors is that we have actually tracked that very carefully, because we - one of the ways our tumors and we collected our tumors over the first four or five years of our activity was working with patients and oncologist to actually implant their tumors, follow the patients, as well as follow what happens to them in real life. But follow what happens to their PDX tumors. So from our own experiences there was an incredibly high concordance rate between what happens in the mouse, what happens in the patient in the actual clinic? The concordance rate was in a high 80% range if you. And that was with patients who actually already had multiple treatments since there - since their mouse is implanted. If you actually you know, took the time element out and just looked at the next treatment the patient got, the next treatment the mouse got, it was almost 100%. Subsequent to that, the Mayo Clinic has put out a big study on concordance of these PDX models and many other academic institutions have done it and they're all finding the same thing, that there's almost 100% match between what happens in these PDX models and what happens in the in the patient. That is true for solid tumors in PDX. What we're trying to do and we found the same thing for the leukaemia models. What we're trying to do now is work in immuno-oncology space to try to prove the same type of accuracy and efficacy in the immuno-oncology models. That's a lot harder, it’s taking us a lot longer in terms of R&D, but our feeling is if we can crack the code it's going to have a huge upside for us and it's going to really help the patients and the pharmaceutical companies.

So, all right. Said another way, and if drug shows a high degree of efficacy in treating a mouse's tumor the chances are very high that that same drug will be effective in treating humans with that same cancer?

Correct. Correct. And that's the whole purpose and that's why I think our company is growing, because it's very expensive for the pharmaceutical companies in terms of these human trials and it's also expensive for them if they're going to have a failed trial. So it's very important for them to really have a sense upfront whether or not this drug is going to make it through. So they want to work on these PDX models because there is a lot of accuracy.

Okay. Great. Thank you very much.

You’re welcome.

[Operator Instructions]